Did you know that your income is not included in the calculation for your credit score? In fact, income does not directly impact your credit score, but how much you earn may affect your ability to pay your bills on time, potentially causing lenders to consider your income when determining if you qualify for a loan. Your income may also have an effect on the individual factors that do go into determining your credit score.
- Payment History
Your payment history comprises 35% of your credit score. If your income isn’t sufficient to build up an emergency fund or meet your monthly spending needs, your credit score may be adversely affected. Paying bills late or missing payments altogether may be a sign that you don’t earn enough for your current lifestyle—and those late payments can hurt. Even one late payment may negatively affect your score.
- Credit Utilization Ratio
Do you rely on credit when you can’t pay your monthly bills? If you fall into this trap, you could increase your credit utilization rate and harm your overall credit score. At 30% of your score, this factor calculates the total amount of credit and loans you use compared to your credit limit. If you use more than 30% of your available credit, this is viewed as a negative to lenders. Earning less does not mean you are a bad credit risk, but when you live beyond your means, you may make poor financial decisions that can cost you in the long run.
- Length of Credit History
When you have sufficient income to take out loans and pay them back on time, you may increase your credit score. The longer your history of responsible credit usage, the higher the rating will be for this category. It calculates the average age of all your accounts and comprises 15% of your credit score.
- Emergency Credit
Do you earn enough to have an emergency fund? Or do you rely on last-minute applications to credit card companies to solve financial crises? Whenever you apply for a new loan or credit card, it may negatively affect your credit score. Calculated at 10% of your score, new credit can be considered be a sign of increased risk.
- Credit Mix Management
When you are able to manage different types of debt and credit, credit rating companies consider you a better risk than those who have only limited experience. Credit mix comprises 10% of your credit score and demonstrates to lenders you can manage different types of debt. When you have a high income and multiple resources, it may be less difficult to manage multiple forms of credit and debt.
To summarize, just because income is not a factor used to calculate your credit score doesn’t mean that lenders will not ask for this information. Whenever you fill out an application for a new loan or credit card, you will be asked about your income and may have to provide a pay stub or other proof such as a tax return. The lender may then calculate your debt to income ratio to see if you qualify for the loan.
It’s always a good idea to get a copy of your credit report at least once a year to correct any mistakes. You can get a free report from each of the three credit reporting agencies, Experian®, TransUnion®, and Equifax®, once per year at AnnualCreditReport.com. Regardless of your income, you don’t want your credit score to be penalized due to an error in reporting or even identity theft.
Are you looking for a personal loan to satisfy your financial needs? Contact Mariner Finance today for answers to your questions and excellent customer service.